Iron ore hits eight-week low, but green shoots on horizon

Peter Ker

The benchmark iron ore price may have fallen to a 55-day low, but most signals suggest the price will rebound over coming months.

Australia’s most lucrative export commodity was fetching $US93.20 a tonne on Thursday, having fallen on each of the past four trading days.

Iron ore prices have been weighed down in 2014 by a huge increase in seaborne supply, but the past week’s price weakness was also thought to be affected by weak lending statistics in China.

Bloomberg reported that China’s broadest measure of new credit was significantly weaker than expected and weaker than previous periods.

China is the bigger buyer of seaborne iron ore, and there are fears the weak credit statistics will flow through to iron ore price weakness.

Iron ore futures measured by the Dalian commodity exchange fell to their lowest level since June 20, but in a positive sign for iron ore producers, the futures were predicting an iron ore price for January delivery that was equivalent to $US106.25 a tonne at current exchange rates.

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That figure is about 14 per cent higher than the current iron ore price, and UBS commodities analyst Daniel Morgan also said he expected the price to rise.

''I think prices should see stability in the months ahead, with some modest upside,'' he said. "The surge in supply out of Australia in early 2014 looks largely complete, with flows set to now hold in [the second half of] 2014.''

UBS expects the iron ore price to average about $US100 a tonne in the second half of 2014 to deliver a full-year average price of $US106 a tonne.

The bank expects the benchmark iron ore price to average $US103 a tonne during the 2015 calendar year.

The benchmark iron ore price has declined by 31 per cent since January 1, and for Australian producers those declines have been compounded by a 4.5 per cent rise in the local currency over the same period.

That combination has meant a double whammy where local miners have had falling revenues on every export unit but, all things being equal, a rising cost base. Many miners have sought to offset the situation with continued cost-cutting.

Aside from high cost producers in China being gradually priced out of business, Mr Morgan said smaller producers in Iran, Malaysia, Peru, Mexico and Chile would also likely be forced to stop exporting at the lower prices.

Small producers in those countries have increased their exports in recent years and were collectively responsible for 208 million tonnes of the 1.2 billion tonnes of seaborne iron ore in 2013.

''In aggregate, these countries have grown faster than the traditional suppliers over the past five years, but likely carry a higher break-even cost base,'' Mr Morgan said.

The higher cost base is likely to cause some of that supply to evaporate as prices fall.